October Horrors

Story outline:

• This month marks the 20th anniversary of Black Monday—the largest post-war single-day drop on the Dow. News stories are quick to point out similarities between then and now.
• Investor fears don't change much. Just because we face similar fears today doesn't mean the market must drop.
• History is a useful tool, but only if you can identify the fundamental driver behind market events.

What do you suppose the odds are we'll survive this October with fewer than 20,000 headlines reminding us this month features the 20th anniversary of Black Monday (the biggest post-war one-day drop in the Dow, percentage-wise)? Or, that we won't be continually admonished "things look frighteningly similar today?" Yeah, we didn't think those odds were stellar either.

Could It Happen Again?
By the Staff, MarketWatch

The previous article delineates worrisome similarities between today and 1987. Inflation fears? Check. Rising oil prices? Check. Middle East tensions? Check check check. Does that mean markets must drop? No no no. With the 10-Year US Treasury rate hovering below 4.6%—and lower than during the height of this summer's credit fright—it's a touch irrational to say investors fear inflation much. Headlines may squawk inflation's a big concern, but if it were true, long-term interest rates would be rising, not dropping back near historic lows. What's more, rising oil prices today are more symptomatic of a growing global economy (as we've stated here previously) and Middle East tensions are nothing new for markets.

Just because investors feared something in the past, and then some horrific thing happened, doesn't mean similar fears today must lead to another horrific thing. Why? Maybe what investors feared didn't actually cause the horrific thing in the past. Or maybe some other fundamental force overpowers the scary thing today—like earnings beating expectations or the positive gap between the market's earnings yield and bond yields globally.

The next article finds still more parallels—a rookie Fed head, an established bull market, credit problems, a weak dollar, a trade deficit, and . . . wait for it . . . Gordon Gecko. What?

The Ides of October
By Michael Kahn, MarketWatch

As we've said repeatedly, there was no credit crunch, just cash-hoarding in fear of one, the dollar doesn't dictate stock market direction, and blaming the trade deficit for a market crash is a stretch since we've had a big and growing trade deficit non-stop for over 25 years. (What went on in all those years the trade deficit didn't make the market drop?) But Gordon Gecko? Come on! What does Michael Douglas making a sequel (to a movie that unfairly demonized Wall Street, we might add) have to do with market direction? We're sure he makes a lot of money but hardly enough to move markets.

In order to predict market events based on something historic, you need something better than "It's October, and investors are worried about inflation." Newsflash—October comes pretty much every year, and investors are always fretting inflation (rightly or wrongly).

How might we better use history to predict market direction? We note periods when earnings yields are above bond yields are marked by strong equity returns historically. But that's not happenstance—there's a fundamental driver behind this phenomenon (i.e., shrinking stock supply—read MarketMinder commentary "Mind the Gap," 09/28/2007). You might have called 2000's tech market peak had you noted historic parallels to the oil energy bubble in 1980—in terms of IPO activity, corporate cash burn-rates, sector growth, sentiment, and so on. And, we know third and fourth years of presidents' terms are likelier to be positive because of dissipating legislative risk aversion (see "Do-Nothing Market Heroes," 04/04/2007). But these things are all grounded in economic fundamentals, not superficial similarities.

History is a powerful tool, instructing what can be reasonable to expect and sometimes what's irrational to fear. For example, this article points out not only the similarities, but the important differences between then and now.

Getting a Handle on 1987
By Michael Santoli, Barron's
https://online.barrons.com/article/SB119102006230143224.html?mod=9_0031_b_this_weeks_magazine_columns

An important feature few mention: So many fearing a replay of Black Monday actually takes a lot of risk out of the market. And, we needn't remind you we just had a healthy bull market correction. Unless a fresh scare story arises (or a fresh take on the very tired credit crunch), we're not likely to see another correction down-leg. But even more important, note our first featured article makes this point: "$10,000 invested in the Dow on Friday, Oct. 16, the last trading day before the crash, and held until the present would still have more than quintupled." Capitalism is awesome. Relax, and enjoy October.